u/brashad78

Had a debate here recently I can't stop thinking about, so I want to throw it to a wider group.

The setup: a bank checks your income, employment, and history, decides you can repay, then structures the loan so that if things go wrong you eat 100% of the loss and the bank is fully protected by collateral. My question: if the bank is that confident, why does it need zero downside? And if it needs zero downside, how confident was it really? A rigorous affordability check that still dumps the entire risk on the borrower feels less like risk management and more like risk dumping.

The pushback I got was: "risk-sharing only works for startups, because a startup makes a profit the investor shares in. A house or a car doesn't return a profit, so it doesn't apply."

I think that's backwards:

• The point of risk-sharing was never the profit, it's the loss structure. Debt is designed so the borrower bears the first losses. Buy a $100k home with an $80k mortgage; a 20% price drop wipes out your entire $20k while the lender is untouched (Mian & Sufi call this "levered losses").
• Risk-sharing home finance already exists. Islamic diminishing musharaka has the bank co-own the home and share the downside. And mainstream economists proposed the same thing to prevent 2008: Mian & Sufi's "shared-responsibility mortgage" and Robert Shiller's "continuous workout mortgage" both cut the borrower's balance when local prices fall.
• The real payoff is incentives. A lender that shares your downside actually wants you to succeed and will restructure instead of foreclosing, exactly how a VC behaves.

Genuine questions:

1. Does the "a house doesn't profit, so risk-sharing can't apply" objection hold, or does it miss the point?
2. Would banks underwrite better and foreclose less if they had skin in your outcome?
3. Why haven't risk-sharing mortgages gone mainstream despite top economists pushing them?

Had a debate here recently I can't stop thinking about, so I want to throw it to a wider group.

The setup: a bank checks your income, employment, and history, decides you can repay, then structures the loan so that if things go wrong you eat 100% of the loss and the bank is fully protected by collateral. My question: if the bank is that confident, why does it need zero downside? And if it needs zero downside, how confident was it really? A rigorous affordability check that still dumps the entire risk on the borrower feels less like risk management and more like risk dumping.

The pushback I got was: "risk-sharing only works for startups, because a startup makes a profit the investor shares in. A house or a car doesn't return a profit, so it doesn't apply."

I think that's backwards:

• The point of risk-sharing was never the profit, it's the loss structure. Debt is designed so the borrower bears the first losses. Buy a $100k home with an $80k mortgage; a 20% price drop wipes out your entire $20k while the lender is untouched (Mian & Sufi call this "levered losses").
• Risk-sharing home finance already exists. Islamic diminishing musharaka has the bank co-own the home and share the downside. And mainstream economists proposed the same thing to prevent 2008: Mian & Sufi's "shared-responsibility mortgage" and Robert Shiller's "continuous workout mortgage" both cut the borrower's balance when local prices fall.
• The real payoff is incentives. A lender that shares your downside actually wants you to succeed and will restructure instead of foreclosing, exactly how a VC behaves.

Genuine questions:

1. Does the "a house doesn't profit, so risk-sharing can't apply" objection hold, or does it miss the point?
2. Would banks underwrite better and foreclose less if they had skin in your outcome?
3. Why haven't risk-sharing mortgages gone mainstream despite top economists pushing them?

Global debt just crossed $315 trillion, ~3x world GDP, two-thirds of it in the advanced economies. It left me with a question I can't un-ask: if everyone is in debt, who does the world actually owe?

Following it honestly led somewhere uncomfortable:

- Modern money is created as debt (BoE's own 2014 bulletin: ~97% of money is bank lending). The principal is created, the interest isn't, so total debt has to grow faster than the money supply. The recurring crashes look structural, not accidental.

- The Ottoman bankruptcy of 1875 is usually cited as proof Islamic economics fails. But the Ottomans avoided interest-bearing foreign debt for centuries and only collapsed AFTER their first European loan in 1854. The default followed *abandoning* the riba prohibition, not applying it.

- Zakat is the part I find most interesting: a 2.5%/yr levy on idle wealth (not income), which structurally punishes hoarding and pushes capital into production. The opposite of how income tax works.

I'm not claiming any current Muslim-majority country runs this well (most don't, and I get into why). I'm arguing the *principles* hold up, and that the West already uses pieces of them (VC = profit/loss sharing; Islamic banks took zero 2008 bailouts).

Wrote the full argument with sources here if useful Link in first comment below

Genuinely want the strongest counterarguments — where does this break?